The Return of Predatory Equity

We are not social scientists or academics, but researching trends in affordable housing is a major part of our job. By maintaining (to the best of our ability) an updated list of multifamily buildings in foreclosure, we are able to target our outreach most effectively, and in some cases, more skilled researchers have digested it and drawn exciting conclusions. It is this somewhat tedious but incredibly important practice of data collection that alerted us to Predatory Equity in 2007 and that now is unveiling a second round of speculation in 2012.

As we have noted here and elsewhere, the way that multifamily buildings are bought and sold in New York City has fundamentally changed since 2008. Rather than purchase a deed to a distressed building, potential property owners purchase delinquent mortgage notes from foreclosing banks. Presumably the note-buyer finishes the foreclosure and takes title to the building at auction, at which point some bring in long-term financing. Because of this, there are almost no multi-family REO properties despite the very high number of foreclosures in this category.

We have tried to track who is buying mortgage notes, and some of that information was released last week in The Real Deal: “Private Equity Firms Snap Up Debt on Small NYC Rentals.” In the past year, the number of private equity firms re-entering the NYC distressed housing market – by way of buying mortgages – has soared. The Real Deal notes some examples:

In February, Stabilis Capital, headquartered in the General Motors building in Midtown, bought the note on six, six-unit buildings in Queens, including 1894 Cornelia Street. Last fall, Madison Realty Capital bought the debt on 12 buildings with a total of 237 units, such as 974 St. Nicholas Avenue in Washington Heights; and in December, Onex Real Estate Partners bought the debt on five buildings with a total of 131 units, including 100 Audobon Avenue in Washington Heights. 

In addition, last June Waterfall Asset Management through its Waterfall Victoria Master Fund, bought the notes on two Bronx properties with a total of 15 units, including 852 East 213 Street and 674 St Anns Avenue; and Richard Maidman’s Townhouse Management between March 2011 and January 2012 bought the notes on five properties — including 735 Bryant Avenue in the Bronx — with a total of 133 units, the survey from UHAB shows. (These totals are preliminary, and the funds may have acquired additional mortgages, UHAB said.)

Many of the deals noted in the article are less than a year old, so it is too early to tell what specifically will happen to the highly distressed housing stock. We are suspicious, though, by what seems like a reoccurring (and regrettable) trend that characterized the pre-2008 housing market. Furthermore, it is not too early to tell what the intentions of private equity investment firms are: private equity investors get into such a business because they are interested in making money. In this high-risk game, investors expect such a large rate of return that in order for these deals to be profitable, the housing involved has to significantly increase in (monetary) value.

While some say that the housing market can only improve, it is important to bear in mind that these investors are purchasing regulated housing. You can increase revenue in two ways: by increasing income or by reducing spending. In regulated housing, it is impossible to significantly increase income (rents) without displacing regulated tenants. (The fierceness and sophistication of New York City renters assures this is no small task.) This leaves reducing spending – severely cutting maintenance and operating on already physically distressed properties. Put simply, we do not understand how private equity plans to make money on rent-regulated housing without acting against the interest of low-to-moderate-income tenants.

We are not professional researchers; we are advocates and activists. Our data is preliminary and by no means comprehensive, and we have an admitted tendency to distrust anyone whose primary interest in owning affordable housing is profit. (“Housing for people, not for profit.”) However, it is safe to say that we’re gearing up for another fight, and it is sure to be a doozy.